Tax laws can be extremely complicated, with many tax breaks requiring a lot of calculation to figure out just what you're entitled to receive. But when it comes to simplicity, you won't find many provisions better than the child tax credit.
The child tax credit is a rare example of truth in advertising, because it is what it says it is: a tax credit that you're entitled to take if you have children who qualify. Not every parent will be able to claim the child tax credit, but those who do can expect to save thousands of dollars on their taxes.
How big is the child tax credit?
Just as in 2020, in 2021 the child tax credit pays up to $2,000 for children 16 or younger at the end of the tax year. You're only allowed to claim the credit if the child qualifies and is your dependent for tax purposes.
The credit lets you reduce your outstanding tax bill, including tax liability that you already covered by having federal income taxes withheld from your paycheck. Even better, if using the credit drops your tax bill to zero, a provision of the tax laws called the additional child tax credit lets you use up to $1,400 of the $2,000 amount as a refundable credit -- meaning that the IRS will cut you a check for that part of the credit.
Other dependents are entitled to a smaller credit. Kids who are 17 or 18, or those who are full-time college students up to age 24, can qualify for a $500 tax credit, all of which is nonrefundable.
Why might I get less than the full child tax credit amount?
There are income limitations for those claiming the child tax credit. If your modified adjusted gross income, which includes just about every form of income you have but reduces the number by some eligible deductions, is more than $400,000 for married joint filers or $200,000 for other taxpayers, then you'll start losing your credit.
For every $1,000 you make over the limit, the amount of credit you can claim falls by $50. As a result, if your income is too high, then you won't be able to claim the credit at all. But depending on how big their original credit was before getting reduced, others could see a partial credit.
What children qualify?
In addition to the age requirements, eligible children have to have lived with you at least half the year, and you have to have provided at least half of the child's financial support during the year. The child is not allowed to file a joint return.
The child must be related to the person claiming the credit. However, in addition to children, stepchildren, foster children, and adopted children are eligible, as are grandchildren, siblings, stepsiblings, half-siblings, nieces, and nephews. Finally, children must be U.S. citizens, nationals, or resident aliens.
For the $500 credit for other dependents, most of these requirements go away. The main requirement is that the person be eligible for you to claim as a dependent. Only citizens, nationals, and resident aliens can qualify.
What is the additional child tax credit?
The name of the additional child tax credit (ACTC) is confusing, because it's not really an additional credit, and it's not for an additional child. The ACTC refers to the refundable portion of the child tax credit, which as mentioned above is $1,400 per child.
However, to get the ACTC, you need to have earned income. Specifically, the amount of the credit can't be more than 15% of the amount by which your earnings exceeds $2,500.
What other credits can people with children claim?
There are some other credits that those with children should look at:
- The child and dependent care tax credit pays 20% to 35% of eligible child care expenses for qualifying families with kids under age 13. Up to $3,000 in expenses for one child or $6,000 for two or more children can qualify.
- The earned income tax credit provides a refundable credit for low- and middle-income taxpayers. Families with children can qualify for much larger credits under this provision than those without children.
Your kids deserve credit
Having a family is expensive, and you want to take every chance to get money you can use toward supporting your children. The child tax credit can cut your taxes and leave you with more to spend on what really matters.